Inside This Issue:
- Why Should I Pay for Your Mistakes? Indemnification: Addressing the Contract Language Details
- Pollution Exclusions in CGL Policy Bars Coverage for Carbon Monoxide Poisoning
- Damage from Fill Material Eroding into Creek Excluded from Coverage by Pollution Exclusion
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Article 1
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Why Should I Pay for Your Mistakes?
Indemnification: Addressing the Contract Language Details
By: J. Kent Holland, Jr.
Indemnification clauses in contracts are described by some courts as being Type I, Type II or Type III. Others categorize the clauses as “Broad Form,” “Intermediate Form” and “Narrow Form” as explained in this paper that was presented by Kent Holland at the last American Bar Association (ABA) Forum on the Construction Industry Conference that was held in Scottsdale, AZ in the Autumn of 2006. These different designations are both informative but they don’t necessarily track with each other and it is important to review actual court opinions to understand the significance of the categories. For a copy of the complete 27 page paper, you may download it as a pdf file from the ConstructionRisk.com website.
A recent decision by the Court of Appeal of the State of California in the case of McCrary Construction Company v. Metal Deck Specialists, Inc. McCrary Construction Co. v. Metal Deck Specialists, Inc., 133 Cal. App. 4th 1528 (2005) is quite helpful in understanding some of the more practical aspects of indemnification provisions and how the language may affect the outcome of litigation concerning indemnification obligations.
McCrary describes the different types of indemnification provisions. Type I indemnity is described by the court as providing “expressly and unequivocally that the Indemnitor is to indemnify the Indemnitee for, among other things, the negligence of the Indemnitee, and the Indemnitee is indemnified whether its liability arises from its sole or concurrent negligence.” (McCrary Construction, quoting MacDonald & Kruse, Inc. v. San Jose Steel Co. (1972) 29 Cal.App.3d 413.) The court calls the next level indemnity “Type II indemnity,” which it describes as being where “the Indemnitee would be indemnified for his or her own passive negligence but not for active negligence.” Typical examples of such Type II clauses, says the court, include those that indemnify the Indemnitee for the Indemnitee’s liability “howsoever same may be caused” or “regardless of responsibility for negligence” or “which might arise in connection with the agreed work” or “caused by or happening in connection with the equipment or the condition, maintenance, possession, operation or use thereof.” (McCrary Construction, quoting MacDonald & Kruse, at p. 419.)
Finally, Type III indemnity “is that which provides that the Indemnitor is to indemnify the Indemnitee for the Indemnitee’s liabilities caused by the Indemnitor, but which does not provide that the Indemnitor is to indemnify the Indemnitee for the Indemnitee’s liabilities that were caused other than by the Indemnitor.” (McCrary Construction, quoting MacDonald & Kruse, at p. 420.) An example suggested by the Court of a Type III clause is a promise to hold Indemnitee harmless “from any … liability … in any way caused by [Indemnitor].”
The McCrary court also quoted from a California Supreme Court in the case of Rossmoor Sanitation, Inc. v. Pylon, Inc., 13 Cal.3d 622 (1975), for the proposition that “If an indemnity clause does not address itself to the issue of an indemnitee’s negligence, it is referred to as a ‘general’ indemnity clause. [citations omitted]. While such clauses may be construed to provide indemnity for a loss resulting in part from an indemnitee’s passive negligence, they will not be interpreted to provide indemnity if an indemnitee has been actively negligent.” The court further stated that provisions purporting to hold an owner harmless “in any suit at law” or “from all claims for damages to persons” or “from any cause whatsoever,” without expressly mentioning an indemnitee’s negligence are deemed to be “general” clauses.
These examples of general indemnity clauses described by the Rossmoor court included provisions of what were classified as type II and type III clauses. Thus, following the Rossmoor decision, the McCrary court states that “an indemnity provision that does not refer to the issue of the indemnitee’s negligence will be considered to be a general indemnity clause under which the indemnitee is not entitled to indemnity for its active negligence, unless the circumstances of the case and language of the contract evince a different intent by the parties.”
Turning to the facts of this particular case, the indemnity provision in Metal Deck’s subcontract with McCrary provided:
Subcontractor agrees to indemnify Contractor against, and save him harmless from, any and all claims, suits or liability for injuries to property, injuries to persons, including death, and from any other claims, suits or liability on account of, or related to, any act or omission, or alleged act or omission of the Subcontractor, or any of his officers, agents, employees or servants. Subcontractor shall be liable to Contractor for all expenses, including court costs and attorney’s fees incurred by Contractor in connection with any such claims, suits or liability, and/or in connection with any claim by Contractor against Subcontractor arising out of the provisions of this article.
A laborer on the project fell through a hole in the roof at the construction site. Metal deck was responsible for having cut the hole. Metal Deck left the hole uncovered when it left the work site and an employee of another subcontractor covered the hole at the request of the prime contractor, McCrary. In covering the hole with plywood, this other subcontractor failed to secure the plywood.
The trial court found that Metal Deck was negligent in not covering the hole and apportioned part of the damages to Metal Deck and part of the damages to McCrary for its action of assuming responsibility for covering the hole. Metal Deck argued that the Prime was not entitled to indemnity under the agreement because the Prime was actively negligent with respect to the accident. The trial court rejected the argument because the indemnity clause didn’t state that the Prime’s active negligence would have any effect on the Metal Deck’s indemnity obligations. The court found the Prime’s conduct didn’t preclude indemnification because “indemnity should be afforded under any circumstances where to do so furthers the manifest intent of the parties to the contract and where the loss sustained would not have occurred without the indemnitor’s negligence.” McCrary, quoting Morton Thiokol, Inc. v. Metal Building Alteration Co., (1987) 193 Cal.Appl.3d 1025, 1029. The court awarded McCrary judgment against Metal Deck in the amount of $688,832.
On appeal, Metal Deck argued that it owed no indemnity to the Prime under the parties’ contract for several reasons. First, it argued that the issue should be determined in accordance with principles of comparative negligence and second, it argued that even under an all-or-nothing approach to indemnity, the Prime should receive nothing because the Prime had been actively negligent. The appellate court agreed with Metal Deck and held that that “The language of the indemnity clause did not purport to require indemnity from Metal Deck for this [negligent] conduct by McCrary, and there is nothing otherwise to suggest that the intent of the parties was to provide indemnity under these circumstances. Accordingly, we find no reason to depart from the general rule that an actively negligent Indemnitee cannot recover under a general indemnity contract.”
Applying these principles to the application of the indemnity provision in the contract between Metal Deck and the prime contractor, McCrary, the court stated that the Prime would not be entitled to indemnity at all because the indemnity provision is Type III indemnity calling for indemnity for liabilities “on account of, or related to, any act or omission” of the subcontractor. Since the clause did not address itself to the issue of the Indemnitee’s negligence, it is a “general” indemnity clause, and as explained by the court could not be interpreted to provide indemnity if an Indemnitee has been actively negligent.
The appellate court acknowledged that the trial court would have the discretion to permit indemnification in some cases of active negligence by the Indemnitee, but it found that in this particular case, the intent of the parties did not contemplate indemnification where, as here, the actions of the prime contractor were not only actively negligent, but where those actions also directly led to the condition of the roof.
This case demonstrates that the decision on how a court will apply the indemnification provisions of a contract ultimately comes down to a determination of the intent of the parties, as evidenced from the language of the contract. Clear and concise language in the indemnification clause of a contract should expressly state the parties’ intent with such clarity that it is unnecessary to argue in court over the meaning and applicability of the clause.
The next section of this paper presents examples of indemnification clauses found in various contracts and explains issues and disputes that might arise in interpreting and applying the clauses. To read this section, please go to the pdf version of this paper that you will find BY CLICKING HERE. ABAIndemnificationPaper.pdf.
About the author: Kent Holland is a construction lawyer located in Tysons Corner , Virginia , with a national practice. He is principal of ConstructionRisk, LLC, providing construction risk management services including change order and claim preparation, analysis and defense, contract preparation, review and negotiation, insurance consulting and risk management, and other services. Mr. Holland is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com. This article is published in ConstructionRisk.com Report, Vol. 9, No. 2. All articles published in this newsletter are available at www.ConstructionRisk.com. This article is the first section of a 27 page paper written and presented by Kent Holland at the last American Bar Association (ABA) Forum on the Construction Industry Conference that was held in Scottsdale , AZ.
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Article 2
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Pollution Exclusions in CGL Policy Bars Coverage for
Carbon Monoxide Poisoning
By: J. Kent Holland, Jr.
The pollution exclusion of a commercial general liability (CGL) policy was enforced to exclude coverage for injuries allegedly caused from carbon monoxide that was emitted from a propane-powered grinder that was being used to grind terrazzo floors while another contractor’s worker was working in the same area installing drywall. The worker filed suit in state court against the owner of the grinder, alleging the company was negligent in failing to provide proper ventilation when operating its grinders and that it failed in its duty to properly monitor the work environment for carbon monoxide gas.
The insurance companies filed a separate declaratory judgment action in federal court, contending that the absolute pollution exclusion bars coverage. The court granted summary judgment in favor of the insurance companies, and this was affirmed by the Federal circuit court on appeal, holding carbon monoxide is an “irritant” that was “dispersed” throughout the work site by the insured contractor. Moreover, the court held that this was a pollutant “brought on” to the premises by the contractor and therefore excluded from coverage.
In Continental Casualty Company v. Advance Terrazzo, 462 F.3d 1002 (8th Cir., 2006), two insurance policies were at issue. The first, by Transportation Insurance Company was issued to the floor contractor, Advance Terrazzo, as the primary commercial general liability (CGL) policy. It is this contractor that was operating the grinder at the job site. In addition to this policy, Advance Terrazzo had an umbrella policy from Continental Casualty Company. Both policies contained absolute pollution exclusions – that applied to exclude coverage whether the pollution was gradual or sudden and accidental.
The language of the absolute pollution exclusion stated that coverage was excluded for “(1) ‘Bodily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants: (d) At or from any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured’s behalf are performing operations…. ( ) If the pollutants are brought on or to the premises, site or location in connection with such operations by such insured, contractor or subcontractor…”
Pollutant is defined under the policy as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”
The federal district court granted the insurance companies’ motion for summary judgment, finding that the absolute pollution exclusion barred coverage for the worker’s claims for injuries arising out of the carbon monoxide that was exhausted from the grinder. Advance Terrazzo, on appeal, argued that the absolute pollution exclusion is ambiguous when applied to routine business hazards such as the release of carbon monoxide from the grinders.
Courts in other states have found the clause to be susceptible to more than one reasonable interpretation, and therefore ambiguous when it comes to applying it situation like this one, where the pollutant is such a common one that it may not readily be considered by some people to be a pollutant within the meaning of the policy exclusion. Courts in Minnesota , however, whose law is applicable here, have previously found the exclusion to be unambiguous when applied to pollutants occurring in the normal course of business activities. This includes indoor pollution.
In particular, the Minnesota Court of Appeals, in the case of Auto-Owners Insurance Co, v. Hanson (1999), applied the absolution pollution exclusion in a situation where an individual was injured from ingestion and absorption of lead in paint chips at a rental property. As additional precedent for applying the exclusion to the facts of this matter, the court cited League of Minn. Cities Insurance v. City of Coon Rapids, which held that the pollution exclusion applied to bar coverage for lung injuries suffered by individuals inside an ice rink that resulted from nitrogen dioxide, a toxic by-product of a Zamboni ice cleaning machine. In that case, the court held that “merely bringing a Zamboni machine on the premises merits exclusion under [the policy].”
In the case at bar, the federal circuit court found no discernable distinction between the release of nitrogen dioxide from a Zamboni and the release of carbon monoxide from a terrazzo grinder. The court rejected Advance Terrazzo’s argument that it did not bring the pollutant (carbon monoxide) onto the premises but instead merely brought on the machine which contained LP gas which is not a pollutant. The court declined to make a distinction between bringing on the machine with LP gas and the carbon monoxide that was directly emitted by using the machine. As explained by the court, because the contractor brought on to the premises the machine that produced the carbon monoxide, “it falls squarely into the policy language triggering the absolute pollution exclusion.”
Comment: This case once again demonstrates that courts in different states have widely different views of the pollution exclusion. Whether the exclusion will be applied to virtually identical facts will often depend upon the jurisdiction. Rather than taking a chance of having no coverage for injuries such as those alleged in this case, contractors that are performing services that have any significant chance of creating a pollutant in the course of their operations should consider purchasing a contractor’s pollution liability (CPL) policy to cover that risk.
About the author: Kent Holland is a construction lawyer located in Tysons Corner , Virginia , with a national practice. He is principal of ConstructionRisk, LLC, providing construction risk management services including change order and claim preparation, analysis and defense, contract preparation, review and negotiation, insurance consulting and risk management, and other services. Mr. Holland is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com. This article is published in ConstructionRisk.com Report, Vol. 9, No. 2.
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Article 3
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Damage from Fill Material Eroding into Creek Excluded from
Insurance Coverage by Pollution Exclusion
By: J. Kent Holland, Jr.
When EPA issued an administrative order to the operator of a rock quarry, and subsequently filed a lawsuit, alleging that the operator had, without a permit, discharged fill material consisting of dirt and rocks into a creek, the quarry operator tendered defense to its Commercial General Liability (CGL) insurance carriers. The insurers denied coverage based on pollution exclusions in their policies. In the quarry operator’s suit against the carriers for breach of contract, the trial court granted summary judgment in favor of the carriers and this judgment was affirmed on appeal.
The rocks and dirt in question were placed by the operator along a stream bed to fill in the main access road to the quarry which had been washed out by the overflowing creek during severe storms. Some of these fill materials then apparently eroded into the creek. The EPA order directed the quarry operator to cease the discharge of fill material and submit an erosion control plan and site restoration plan for both the site and for the creek. EPA asserted that the dirt and rocks “are dredged and fill material, hence, pollutants within the meaning of sections 301(a) and 404” of the Clean Water Act.
The insurance carriers asserted that dirt and rocks were pollutants within the policy definitions and thus subject to the pollution exclusion. It did not matter that dirt and rocks are naturally occurring in nature. The fact that they were dumped by the operator into the waterway made them pollutants.
In the comment at the conclusion of this case, note that I offer the following thought: I am starting to wonder if perhaps it is appropriate to begin filing lawsuits against plaintiffs who sue their carriers for pollution coverage in a jurisdiction where courts have repeatedly interpreted and applied identical or virtually identical pollution exclusions to bar coverage for the virtually the same matters claimed. At what point is it an abuse of process to sue a carrier demanding coverage for something one knows or should know is not covered under the terms of the policy as commonly understood and as commonly applied by the courts in that jurisdiction?
In Ortega Rock Quarry v. Golden Eagle Insurance Corp., 141 Cal. App. 4th 969, the quarry operator (Ortega) argued that the pollution exclusion could not be enforced to bar coverage because it was ambiguous in that it failed to adopt the definition of pollutants set forth in the Clean Water Act. Ortega also argued that because the rocks and dirt were naturally occurring they could not be considered pollutants. Finally, Ortega argued that because the pollution exclusion of the policy listed examples of pollutants that were not covered, anything that was not listed as an example could not be deemed a pollutant under the definition. The appellate court rejected each of Ortega’s arguments as explained below.
Failure to Incorporate Statutory Definitions of Pollution
Using the definition of pollutants found in the Clean Water Act (CWA) for insight into the scope of the policy definition of pollutant is useful. It defines pollutants as “dredged spoil, sewage sludge, munitions, chemical wastes, biological materials, radioactive materials, heat, wrecked or discarded equipment, rock, sand, cellar dirt and industrial, municipal and agricultural waste discharged into water.” From this definition, it is readily apparent that rock and dirt such as that involved in this case are within the definition of pollutant under the CWA.
The court concluded that state and federal environmental laws may provide insight into the scope of the policies’ definition of pollutants without being specifically incorporated into the definitions. Failure to specifically incorporate statutory definitions does not make the language of the pollution exclusion ambiguous.
Application of Pollution Exclusion to Natural Materials
Natural dirt and rocks are pollutants within the meaning of the Clean Water Act when placed in waters of the United States . A creek such as that involved here is considered “waters of the United States ” within the meaning of the Act. Previous decisions in the courts have held that naturally occurring substances can be pollutants when they are moved to a place differing from where they occur naturally. For example, natural organic fertilizer has been held to be a pollutant within the meaning of CGL pollution exclusions when the fertilizer leached into ground water or contaminated water sources. (See Space v. Farm Family Mutual Ins. Co., 235 A.D.2d 797). It has also been held that naturally occurring hazardous substances are deemed pollutants when an “unnatural process” such as mining causes them to be found in a location other than where they originally naturally occurred. (See Gold Fields Am. Corp. v. Aetna Casualty, 295 A.D.2d 289). In the current case, the appellate court held the trial court was correct in concluding that because the rocks and dirt had been moved from their natural location into the stream bed, they became pollutants within the meaning of the pollution exclusion of the policies.
Doctrine of Ejusdem Generis
Ortega argued that because the pollution exclusion used the word “including” immediately before the list of examples of pollutants that were excluded, this list was exclusive and that anything not listed was therefore not deemed a pollutant. As the court explained, “Ortega contended, the only ‘irritants’ or ‘contaminants’ that are excluded from coverage are those that are enumerated after the word ‘including,’ i.e., ‘smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.’”
Under the principle of ejusdem generis, the more particular expressions in a contract qualify those that are general. Thus, in an insurance policy, “specific provisions rather than general provisions govern the insurance contract relating to a particular subject, even though the general provision, standing alone, would be broad enough to include the subject to which the more specific provision relates.”
The term “including” preceding a list of examples is not always, says the court, used as a term of limitation. For example, the word “including” when used in a statute is typically a term of enlargement rather than one of limitation. The doctrine of ejusdem generis does not apply to create a limitation on the general exclusion when the context demonstrates a contrary intention. In this case, the court found that “the intention that damages caused by discharge of any irritant or contaminant be excluded is manifest.
In looking at other decisions from various state jurisdictions, this court noted that this same question has been raised and answered with courts repeatedly holding that the exclusion is not ambiguous and that the listing of pollutants is not exclusive. One decision cited by the court that appeared to be directly on point explained that “defendant disregards the controlling term that precedes the list of examples. The definition clearly states that pollutants shall consist of ‘any solid, liquid, gaseous, or thermal irritant or contaminant including smoke, vapor …. In context, the term ‘including’ clearly signifies that the ensuing list is not one of limitation.” (See Pa. Nat’l Mut. Cas. Ins. Co. v. Triangle Paving, Inc., 973 F. Supp. 560).
For all these reasons, the court concluded that the pollution exclusion was not ambiguous and that the trial court properly ruled that it excluded coverage for the quarry activities that resulted in rocks and dirt being put into the stream.
Comment:
The court cites examples of other naturally occurring materials that become “pollutants” when they end up in a place such as ground water or a stream where they would not naturally be located. Mine tailings consisting of sand, silt, clay and trace metals have been held to be pollutants within the meaning of insurance policy pollution exclusions similar to the ones at issue in this case. Sand and gravel have also been found to be pollutants within the meaning of the pollution exclusion.
Once again, this case demonstrates that courts are recognizing the plain intent of the pollution exclusion to exclude coverage for situations such as that involved here even though the “pollutant” is naturally occurring and is not a substance that was man made such as chemical or hazardous wastes. And once again, the solution for an operator of a facility such as a rock quarry is to purchase pollution insurance coverage such as a pollution legal liability policy, specifically designed to provide pollution coverage. After all these years of pollution exclusions being enforced by courts, I find it surprising that so many cases like this one are continuing to be filed.
I am starting to wonder if perhaps it is appropriate to begin filing lawsuits against plaintiffs who sue their carriers for pollution coverage when courts have repeatedly interpreted and applied identical or virtually identical pollution exclusions to bar coverage for the virtually the same matters claimed by these plaintiffs. At what point is it an abuse of process to sue a carrier demanding coverage for something one knows or should know is not covered under the terms of the policy as commonly understood and as commonly applied by the courts in that jurisdiction?
About the author: Kent Holland is a construction lawyer located in Tysons Corner , Virginia , with a national practice. He is principal of ConstructionRisk, LLC, providing construction risk management services including change order and claim preparation, analysis and defense, contract preparation, review and negotiation, insurance consulting and risk management, and other services. Mr. Holland is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com. This article is published in ConstructionRisk.com Report, Vol. 9, No. 2. All articles published in this newsletter are available at www.ConstructionRisk.com.
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RED VECTOR.COM — ON-LINE COURSES
Do you need year end continuing education courses? Currently available on-line risk management courses written by Kent Holland for RedVector, (http://www.redvector.com/instructors/view_related_courses.asp?id=195) include: ABCs of Time, Goals and Purpose – The Big Picture. Also available are: Contract Guide for the Design Professional, Design Build Professional Liability Risk Management and Insurance; Site Safety Risk and Liability; Risk Management for the Design Professional; Managing Communication, Documentation and Reports; Insurance for Design-Build and Complex Projects; Construction Contract Law; Contract Claims against Design Professionals; Insurance Coverage Disputes; and Environmental Claims.
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ABOUT THIS NEWSLETTER & A DISCLAIMER
This newsletter Report is published and edited by J. Kent Holland, Jr., J.D. The Report is independent of any insurance company, law firm, or other entity, and is distributed with the understanding that ConstructionRisk.com, LLC, and the editor and writers, are not hereby engaged in rendering legal services or the practice of law. Further, the content and comments in this newsletter are provided for educational purposes and for general distribution only, and cannot apply to any single set of specific circumstances. If you have a legal issue to which you believe this newsletter relates, we urge you to consult your own legal counsel. ConstructionRisk.com, LLC, and its writers and editors, expressly disclaim any responsibility for damages arising from the use, application, or reliance upon the information contained herein.
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